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COGNEX CORP - Quarter Report: 2004 April (Form 10-Q)

Cognex Corporation 10-Q
Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

     [X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended April 4, 2004 or

     [   ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _________ to _________

Commission File Number 0-17869

COGNEX CORPORATION


(Exact name of registrant as specified in its charter)
     
Massachusetts   04-2713778

 
 
 
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

One Vision Drive
Natick, Massachusetts 01760-2059
(508) 650-3000


(Address, including zip code, and telephone number,
including area code, of principal executive offices)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

         
 
Yes [X] No [   ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

         
 
Yes [X] No [   ]

     As of May 2, 2004, there were 45,220,758 shares of Common Stock, $.002 par value, of the registrant outstanding.



 


INDEX

             
  FINANCIAL INFORMATION     1  
  Financial Statements     1  
 
  Consolidated Statements of Operations for the three-month periods ended April 4, 2004 and March 30, 2003     1  
 
  Consolidated Balance Sheets at April 4, 2004 and December 31, 2003     2  
 
  Consolidated Statement of Stockholders’ Equity for the three-month period ended April 4, 2004     3  
 
  Consolidated Condensed Statements of Cash Flows for the three-month periods ended April 4, 2004 and March 30, 2003     4  
 
  Notes to Consolidated Financial Statements     5  
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     14  
  Quantitative and Qualitative Disclosures About Market Risk     17  
  Controls and Procedures     17  
  OTHER INFORMATION     18  
  Legal Proceedings     18  
  Changes in Securities and Use of Proceeds     18  
  Defaults Upon Senior Securities     18  
  Submission of Matters to a Vote of Security Holders     18  
  Other Information     18  
  Exhibits and Reports on Form 8-K     18  
 
  Signatures     19  
 Ex-31.1 CEO Certification
 Ex-31.2 CFO Certification
 Ex-32.1 CEO Certification pursuant to Sec. 906
 Ex-32.2 CFO Certification pursuant to Sec. 906

 


Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

COGNEX CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)
                 
    Three Months Ended
    April 4,   March 30,
    2004
  2003
    (unaudited)
Revenue
               
Product
  $ 42,560     $ 28,248  
Service
    5,609       4,640  
 
   
 
     
 
 
 
    48,169       32,888  
Cost of revenue
               
Product
    11,333       8,870  
Service
    3,456       2,846  
 
   
 
     
 
 
 
    14,789       11,716  
Gross margin
               
Product
    31,227       19,378  
Service
    2,153       1,794  
 
   
 
     
 
 
 
    33,380       21,172  
Research, development, and engineering expenses
    6,898       5,983  
Selling, general, and administrative expenses
    16,314       13,244  
 
   
 
     
 
 
Operating income
    10,168       1,945  
Foreign currency gain (loss)
    625       (627 )
Investment and other income
    1,274       1,294  
 
   
 
     
 
 
Income before provision for income taxes
    12,067       2,612  
Income tax provision
    3,500       819  
 
   
 
     
 
 
Net income
  $ 8,567     $ 1,793  
 
   
 
     
 
 
Net income per common and common-equivalent share:
               
Basic
  $ 0.19     $ 0.04  
 
   
 
     
 
 
Diluted
  $ 0.18     $ 0.04  
 
   
 
     
 
 
Weighted-average common and common-equivalent shares outstanding:
               
Basic
    44,512       42,666  
 
   
 
     
 
 
Diluted
    46,752       43,557  
 
   
 
     
 
 
Cash dividends per common share
  $ 0.06     $  
 
   
 
     
 
 

The accompanying notes are an integral part of these consolidated financial statements.

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COGNEX CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)
                 
    April 4,   December 31,
    2004
  2003
    (unaudited)        
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 105,982     $ 76,227  
Short-term investments
    80,752       56,406  
Accounts receivable, less reserves of $2,615 and $2,613 in 2004 and 2003, respectively
    26,456       26,697  
Inventories
    14,221       15,519  
Deferred income taxes
    8,479       8,223  
Prepaid expenses and other current assets
    17,758       14,526  
 
   
 
     
 
 
Total current assets
    253,648       197,598  
Long-term investments
    147,925       170,869  
Property, plant, and equipment, net
    24,500       24,980  
Deferred income taxes
    19,374       19,428  
Intangible assets, net
    7,960       8,582  
Goodwill, net
    6,447       7,222  
Other assets
    3,867       3,854  
 
   
 
     
 
 
 
  $ 463,721     $ 432,533  
 
   
 
     
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
  $ 5,538     $ 5,555  
Accrued expenses
    32,750       32,098  
Customer deposits
    2,641       3,932  
Deferred revenue
    6,028       5,702  
 
   
 
     
 
 
Total current liabilities
    46,957       47,287  
Other liabilities
    243       252  
Commitments (Notes 3, 7, 8, and 9)
               
Stockholders’ equity:
               
Common stock, $.002 par value –
               
Authorized: 140,000 shares, issued: 49,239 and 48,186 shares in 2004 and 2003, respectively
    98       96  
Additional paid-in capital
    234,353       209,679  
Treasury stock, at cost, 4,263 and 4,253 shares in 2004 and 2003, respectively
    (72,765 )     (72,445 )
Retained earnings
    264,615       258,724  
Accumulated other comprehensive loss
    (9,780 )     (11,060 )
 
   
 
     
 
 
Total stockholders’ equity
    416,521       384,994  
 
   
 
     
 
 
 
  $ 463,721     $ 432,533  
 
   
 
     
 
 

The accompanying notes are an integral part of these consolidated financial statements.

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COGNEX CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands)
                                         
                         
    Common Stock
  Additional
Paid-in
  Treasury Stock
    Shares
  Par Value
  Capital
  Shares
  Cost
Balance at December 31, 2003
    48,186     $ 96     $ 209,679       4,253     $ (72,445 )
Issuance of stock under stock option, stock purchase, and other plans
    1,053       2       20,725       10       (320 )
Tax benefit from exercise of stock options
                    3,949                  
Comprehensive income:
                                       
Net income
                                       
Payment of dividends
                                       
Losses on foreign intercompany loans, net of gains on currency swaps, net of tax of $434
                                       
Net unrealized gain on available-for-sale investments, net of tax of $106
                                       
Foreign currency translation adjustment
                                       
Comprehensive income
                                       
 
   
 
     
 
     
 
     
 
     
 
 
Balance at April 4, 2004 (unaudited)
    49,239     $ 98     $ 234,353       4,263     $ (72,765 )
 
   
 
     
 
     
 
     
 
     
 
 

     

[Additional columns below]

[Continued from above table, first column(s) repeated]

                                 
            Accumulated            
            Other           Total
    Retained   Comprehensive   Comprehensive   Stockholders’
    Earnings
  Loss
  Income
  Equity
Balance at December 31, 2003
  $ 258,724     $ (11,060 )           $ 384,994  
Issuance of stock under stock option, stock purchase, and other plans
                            20,407  
Tax benefit from exercise of stock options
                            3,949  
Comprehensive income:
                               
Net income
    8,567             $ 8,567       8,567  
Payment of dividends
    (2,676 )                     (2,676 )
Losses on foreign intercompany loans, net of gains on currency swaps, net of tax of $434
            (739 )     (739 )     (739 )
Net unrealized gain on available-for-sale investments, net of tax of $106
            180       180       180  
Foreign currency translation adjustment
            1,839       1,839       1,839  
 
                   
 
         
Comprehensive income
                  $ 9,847          
 
   
 
     
 
     
 
     
 
 
Balance at April 4, 2004 (unaudited)
  $ 264,615     $ (9,780 )           $ 416,521  
 
   
 
     
 
             
 
 

The accompanying notes are an integral part of these consolidated financial statements.

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COGNEX CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)
                 
    Three Months Ended
    April 4,   March 30,
    2004
  2003
    (unaudited)
Cash flows from operating activities:
               
Net income
  $ 8,567     $ 1,793  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    2,566       2,420  
Tax benefit from exercise of stock options
    3,949       270  
Change in current assets and current liabilities
    (821 )     (289 )
Other
    (561 )     650  
 
   
 
     
 
 
Net cash provided by operating activities
    13,700       4,844  
Cash flows from investing activities:
               
Purchase of investments
    (71,993 )     (53,194 )
Maturity and sale of investments
    70,019       37,554  
Purchase of property, plant, and equipment
    (570 )     (561 )
 
   
 
     
 
 
Net cash used in investing activities
    (2,544 )     (16,201 )
Cash flows from financing activities:
               
Payment of dividends
    (2,676 )      
Issuance of stock under stock option, stock purchase, and other plans
    20,407       1,186  
 
   
 
     
 
 
Net cash provided by financing activities
    17,731       1,186  
Effect of foreign exchange rate changes on cash
    868       276  
 
   
 
     
 
 
Net increase (decrease) in cash and cash equivalents
    29,755       (9,895 )
Cash and cash equivalents at beginning of period
    76,227       60,864  
 
   
 
     
 
 
Cash and cash equivalents at end of period
  $ 105,982     $ 50,969  
 
   
 
     
 
 

The accompanying notes are an integral part of these consolidated financial statements.

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COGNEX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: Summary of Significant Accounting Policies

As permitted by the rules of the Securities and Exchange Commission applicable to Quarterly Reports on Form 10-Q, these notes are condensed and do not contain all disclosures required by generally accepted accounting principles. Reference should be made to the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

In the opinion of the management of Cognex Corporation, the accompanying consolidated unaudited financial statements contain all adjustments necessary to present fairly the Company’s financial position at April 4, 2004, and the results of its operations for the three-month periods ended April 4, 2004 and March 30, 2003, and changes in stockholders’ equity and cash flows for the periods presented.

The results disclosed in the Consolidated Statements of Operations for the three-month period ended April 4, 2004 are not necessarily indicative of the results to be expected for the full year. Certain amounts reported in prior periods have been reclassified to be consistent with the current period presentation.

Stock-Based Compensation Plans

The Company recognizes compensation costs using the intrinsic value based method described in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Net income and net income per share as reported in these consolidated financial statements and on a pro forma basis, as if the fair value based method described in Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” had been adopted, are as follows (in thousands):

                 
    Three Months Ended
    April 4,   March 30,
    2004
  2003
Net income, as reported
  $ 8,567     $ 1,793  
Less: Total stock-based compensation costs determined under fair value based method, net of tax
    (3,703 )     (3,171 )
 
   
 
     
 
 
Net income (loss), pro forma
  $ 4,864     $ (1,378 )
 
   
 
     
 
 
Basic net income per share, as reported
  $ 0.19     $ 0.04  
Basic net income (loss) per share, pro forma
  $ 0.11     $ (0.03 )
Diluted net income per share, as reported
  $ 0.18     $ 0.04  
Diluted net income (loss) per share, pro forma
  $ 0.11     $ (0.03 )

For the purpose of providing pro forma disclosures, the fair values of stock options granted were estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions:

                 
    Three Months Ended
    April 4,   March 30,
    2004
  2003
Risk-free interest rate
    2.8 %     2.0 %
Expected life (in years)
    3.2       2.4  
Expected volatility
    45 %     59 %
Expected annualized dividend yield
    .69 %      

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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2: New Pronouncements

In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, “Consolidation of Variable Interest Entities,” to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities, and activities of another entity. Previously, a company generally included other entities in its consolidated financial statements only if it controlled the entity through voting interests. Interpretation No. 46 changes that guidance by requiring variable interest entities, as defined, to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns. Interpretation No. 46 also requires disclosure about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest. On December 24, 2003, the FASB deferred the effective date of Interpretation No. 46 for certain transactions until periods ending after March 15, 2004. The adoption of Interpretation No. 46 during the quarter ended April 4, 2004 did not have a material impact on the Company’s consolidated financial statements.

The Company has a limited partnership interest in Venrock Associates III, L.P., a venture capital fund and a deposit on certain real estate for which it has an option to purchase. While the Company’s investment in these entities represents a variable interest, the Company believes it is not the primary beneficiary.

NOTE 3: Cash, Cash Equivalents, and Investments

Cash, cash equivalents, and investments consist of the following (in thousands):

                 
    April 4,   December 31,
    2004
  2003
Cash
  $ 85,936     $ 49,980  
Municipal bonds
    20,046       26,247  
 
   
 
     
 
 
Total cash and cash equivalents
    105,982       76,227  
 
   
 
     
 
 
Municipal bonds
    80,752       56,406  
 
   
 
     
 
 
Total short-term investments
    80,752       56,406  
 
   
 
     
 
 
Municipal bonds
    132,687       156,511  
Corporate bonds
    4,188       4,212  
Limited partnership interest
    11,050       10,146  
 
   
 
     
 
 
Total long-term investments
    147,925       170,869  
 
   
 
     
 
 
 
  $ 334,659     $ 303,502  
 
   
 
     
 
 

On June 30, 2000, Cognex Corporation became a Limited Partner in Venrock Associates III, L.P., a venture capital fund. A director of the Company is a Managing General Partner of Venrock Associates. The Company has committed to a total investment in the limited partnership of up to $25,000,000, of which $14,375,000 and $13,625,000 had been contributed as of April 4, 2004 and December 31, 2003, respectively. The commitment to contribute capital expires on January 1, 2005, and the Company does not have the right to withdraw from the partnership prior to December 31, 2010.

During the three-month period ended April 4, 2004, the Company recorded realized gains on the fund’s investments, net of fund expenses, of $154,000. At April 4, 2004, the carrying value of this investment was $11,050,000 compared to an estimated fair value, as determined by the General Partner, of $10,212,000. The unrealized loss of $838,000 was determined to be temporary.

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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4: Inventories

Inventories consist of the following (in thousands):

                 
    April 4,   December 31,
    2004
  2003
Raw materials
  $ 7,727     $ 8,948  
Work-in-process
    4,579       3,514  
Finished goods
    1,915       3,057  
 
   
 
     
 
 
 
  $ 14,221     $ 15,519  
 
   
 
     
 
 

In the fourth quarter of 2001, the Company recorded a $16,300,000 charge in “Cost of product revenue” on the Consolidated Statements of Operations for excess inventories and purchase commitments resulting from an extended slowdown in the semiconductor and electronics industries, as well as the expected transition to newer Cognex hardware platforms by the Company’s OEM customers. A total of $12,500,000 of this charge represented reserves against existing inventories and was accordingly included in “Inventories” on the Consolidated Balance Sheet at December 31, 2001. The remaining $3,800,000 of the charge represented commitments to purchase excess components and systems from various suppliers and accordingly was included in “Accrued Expenses” on the Consolidated Balance Sheet at December 31, 2001.

The following table summarizes the changes in the inventory-related reserves established in the fourth quarter of 2001 (in thousands):

                         
                    Statement of
    Balance Sheet
  Operations
    Inventories
  Accrued Expenses
  Benefits
Reserve balance at December 31, 2003
  $ 9,383     $ 1,400          
 
   
 
     
 
         
Benefits to cost of product revenue recorded in 2003
                  $ 1,290  
 
                   
 
 
Inventory sold to customers
    (216 )         $ 216  
Inventory sold to brokers
    (46 )           46  
Write-off and scrap of inventory
    (59 )            
 
   
 
     
 
     
 
 
Reserve balance at April 4, 2004
  $ 9,062     $ 1,400          
 
   
 
     
 
         
Benefits to cost of product revenue recorded in 2004
                  $ 262  
 
                   
 
 

A favorable settlement of the remaining purchase commitments may result in a recovery of a portion of the remaining $1,400,000 accrued at April 4, 2004.

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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5: Intangible Assets

Amortized intangible assets consist of the following (in thousands):

                         
    Gross           Net
    Carrying   Accumulated   Carrying
April 4, 2004   Amount
  Amortization
  Amount
                         
Customer contracts and relationships
  $ 7,600     $ 706     $ 6,894  
Complete technology
    5,364       4,417       947  
Patents
    109       22       87  
Non-compete agreements
    48       16       32  
 
   
 
     
 
     
 
 
 
  $ 13,121     $ 5,161     $ 7,960  
 
   
 
     
 
     
 
 
                         
    Gross           Net
    Carrying   Accumulated   Carrying
December 31, 2003   Amount
  Amortization
  Amount
                         
Customer contracts and relationships
  $ 7,832     $ 492     $ 7,340  
Complete technology
    5,388       4,280       1,108  
Patents
    113       17       96  
Non-compete agreements
    50       12       38  
 
   
 
     
 
     
 
 
 
  $ 13,383     $ 4,801     $ 8,582  
 
   
 
     
 
     
 
 

Aggregate amortization expense for the three-month periods ended April 4, 2004 and March 30, 2003 was $383,000 and $102,000, respectively.

Estimated amortization expense for the current fiscal year and succeeding fiscal years is as follows (in thousands):

         
Year
  Amount
2004
  $ 1,510  
2005
    1,204  
2006
    1,085  
2007
    1,033  
2008
    942  
Thereafter
    2,569  
 
   
 
 
Total
  $ 8,343  
 
   
 
 

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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6: Goodwill

The Company has two reporting units with goodwill, the Modular Vision Systems Division (MVSD) and the Surface Inspection Systems Division (SISD), which are also reportable segments.

The changes in the carrying amount of goodwill during the three-month period ended April 4, 2004 are as follows (in thousands):

                         
    MVSD
  SISD
  Consolidated
Balance at December 31, 2003
  $ 4,522     $ 2,700     $ 7,222  
Purchase price adjustment (Note 12)
    (514 )           (514 )
Foreign exchange rate changes
    (165 )     (96 )     (261 )
 
   
 
     
 
     
 
 
Balance at April 4, 2004
  $ 3,843     $ 2,604     $ 6,447  
 
   
 
     
 
     
 
 

NOTE 7: Warranty Obligations

The Company warrants its hardware products to be free from defects in material and workmanship for periods ranging from six months to two years from the time of sale based upon the product being purchased and the terms of the customer’s contract. Estimated warranty obligations are evaluated and recorded at the time of sale based upon historical costs to fulfill warranty obligations. Provisions may also be recorded subsequent to the time of sale whenever specific events or circumstances impacting product quality that would not have been taken into account using historical data become known. Warranty obligations are included in “Accrued expenses” on the Consolidated Balance Sheets.

The changes in the warranty obligation are as follows (in thousands):

         
Balance at December 31, 2003
  $ 2,119  
Provisions for warranties issued during the period
    422  
Fulfillment of warranty obligations
    (342 )
Foreign exchange rate changes
    (54 )
 
   
 
 
Balance at April 4, 2004
  $ 2,145  
 
   
 
 

NOTE 8: Indemnification Provisions

Except as limited by Massachusetts law, the by-laws of the Company require it to indemnify certain current or former directors, officers, and employees of the Company against expenses incurred by them in connection with each proceeding in which he or she is involved as a result of serving or having served in certain capacities. Indemnification is not available with respect to a proceeding as to which it has been adjudicated that the person did not act in good faith in the reasonable belief that the action was in the best interests of the Company. The maximum potential amount of future payments the Company could be required to make under these provisions is unlimited. The Company has never incurred significant costs related to these indemnification provisions. As a result, the Company believes the estimated fair value of these provisions is minimal.

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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8: Indemnification Provisions (continued)

The Company accepts standard limited indemnification provisions in the ordinary course of business, whereby it indemnifies its customers for certain direct damages incurred in connection with third-party patent or other intellectual property infringement claims with respect to the use of the Company’s products. The term of these indemnification provisions generally coincides with the customer’s use of the Company’s products. The maximum potential amount of future payments the Company could be required to make under these provisions is always subject to fixed monetary limits. The Company has never incurred significant costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, the Company believes the estimated fair value of these provisions is minimal.

The Company also accepts limited indemnification provisions from time to time, whereby it indemnifies customers for certain direct damages incurred in connection with bodily injury and property damage arising from the installation of the Company’s products. The term of these indemnification provisions generally coincides with the period of installation. The maximum potential amount of future payments the Company could be required to make under these provisions is limited and is likely recoverable under the Company’s insurance policies. As a result of this coverage, and the fact that the Company has never incurred significant costs to defend lawsuits or settle claims related to these indemnification provisions, the Company believes the estimated fair value of these provisions is minimal.

NOTE 9: Guarantees

On March 25, 2004, the Company provided standby letters of credit totaling 3,146,280,000 Yen (or approximately $30,091,000 based upon the exchange rate at April 4, 2004) to taxing authorities in Japan. These standby letters of credit replace the bank guarantees that the Company provided on May 27, 2003 and are included in short-term and long-term investments on the Consolidated Balance Sheets. The Tokyo Regional Taxation Bureau (TRTB) has asserted that Cognex Corporation has a permanent establishment in Japan that would require certain income, previously reported on U.S. tax returns for the years ended December 31, 1997 through December 31, 2001, to be subject instead to taxation in Japan. The Company disagrees with this position and believes that this assertion is inconsistent with principles under the U.S. — Japan income tax treaty. The Company has filed a notice of objection and request for deferral of tax payment and intends to contest this assessment vigorously, although no assurances can be made that the Company will prevail in this matter. In September 2003, the Company also filed a request with the Internal Revenue Service Tax Treaty Division for competent authority assistance. Until this matter is resolved, the Company is required to provide bank guarantees to collateralize these tax assessments. These guarantees expire in approximately one year. Should the TRTB prevail in its assertion, the income in question would be taxable in Japan and the Company would be required to pay approximately $30,091,000 in taxes, interest and penalties to Japanese taxing authorities. The Company would then be entitled to a recoup the majority of this amount from taxing authorities in the U.S.

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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10: Net Income Per Share

Net income per share is calculated as follows (In thousands, except per share amounts):

                 
    Three Months Ended
    April 4,   March 30,
    2004
  2003
    (unaudited)
Net income
  $ 8,567     $ 1,793  
 
   
 
     
 
 
Basic:
               
Weighted-average common shares outstanding
    44,512       42,666  
 
   
 
     
 
 
Net income per common share
  $ 0.19     $ 0.04  
 
   
 
     
 
 
Diluted:
               
Weighted-average common shares outstanding
    44,512       42,666  
Effect of dilutive stock options
    2,240       891  
 
   
 
     
 
 
Weighted-average common and common-equivalent shares outstanding
    46,752       43,557  
 
   
 
     
 
 
Net income per common and common-equivalent share
  $ 0.18     $ 0.04  
 
   
 
     
 
 

Stock options to purchase 857,214 and 6,127,543 shares of common stock were outstanding during the three-month periods ended April 4, 2004 and March 30, 2003, respectively, but were not included in the calculation of diluted net income per common share because the options’ exercise prices were greater than the average market price of the Company’s common stock during those periods.

NOTE 11: Segment Information

The Company has two reportable segments: the Modular Vision Systems Division (MVSD) and the Surface Inspections Systems Division (SISD). MVSD designs, develops, manufactures, and markets modular vision systems that are used to control the manufacturing of discrete items by locating, identifying, inspecting, and measuring them during the manufacturing process. SISD designs, develops, manufactures, and markets surface inspection vision systems that are used to inspect surfaces of materials that are processed in a continuous fashion to ensure there are no flaws or defects in the surfaces. Segments are determined based upon the way that management organizes its business for making operating decisions and assessing performance. The Company evaluates segment performance based upon income or loss from operations.

The following table summarizes information about the Company’s segments (in thousands):

                                 
                    Reconciling    
    MVSD
  SISD
  Items
  Consolidated
Three Months Ended
                               
April 4, 2004
                               
Product revenue
  $ 38,379     $ 4,181     $     $ 42,560  
Service revenue
    3,892       1,717             5,609  
Operating income
    12,281       93       (2,206 )     10,168  
Three Months Ended
                               
March 30, 2003
                               
Product revenue
  $ 23,528     $ 4,720     $     $ 28,248  
Service revenue
    3,101       1,539             4,640  
Operating income
    3,357       514       (1,926 )     1,945  

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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11: Segment Information (continued)

Reconciling items consist of unallocated corporate expenses, which primarily include corporate headquarters costs and patent infringement litigation. Asset information by segment is not produced internally for use by the chief operating decision maker, and therefore, is not presented. Asset information is not provided because the cash and investments are commingled and the divisions share assets and resources in a number of locations around the world.

NOTE 12: Acquisitions

Acquisition of Siemens Dematic AG Wafer Identification Business

On March 31, 2003, the Company acquired the wafer identification business of Siemens Dematic AG, a subsidiary of Siemens AG. Siemens Dematic is a leading supplier of logistics and factory automation equipment and had been a leading supplier of wafer identification systems to semiconductor manufacturers in Europe. Under the terms of the agreement, the Company acquired the rights to all of Siemens’ patented and unpatented wafer identification technology, as well as substantially all of the assets related to its wafer identification business. This acquisition enhances the Company’s position as a leading provider of wafer identification systems worldwide. The results of operations of the acquired business have been included in the Company’s consolidated results of operations since the date of the acquisition. The historical results of operations of the acquired business were not material compared to the consolidated results of operations, and therefore, pro forma results are not presented.

The original purchase price consisted of 7,000,000 Euros in cash (or approximately $7,630,000) paid on March 31, 2003, with the potential for an additional cash payment in 2005 of up to 1,700,000 Euros (or approximately $2,063,000) depending upon the achievement of certain performance criteria. The contingent consideration will be recorded as purchase price when paid and will be allocated to goodwill. The March 31, 2003 cash payment of 7,000,000 Euros was based upon an estimated balance sheet for the wafer identification business as of March 31, 2003. After receipt of the final March 31, 2003 balance sheet and resolution of certain items in dispute, Siemens reimbursed Cognex 796,000 Euros (or $868,000).

The final purchase price of 6,204,000 Euros (or approximately $6,762,000) was allocated as follows: $616,000 to inventories; $274,000 to accounts receivable; $25,000 to accrued expenses; $4,469,000 to customer contracts and relationships, to be amortized over eight years; $447,000 to complete technology, to be amortized over five years; $98,000 to patents, to be amortized over five years; $44,000 to non-compete agreements, to be amortized over three years; and $839,000 to goodwill, assigned to the MVSD segment, none of which is deductible for tax purposes.

Acquisition of Gavitec AG Machine Vision Business

On December 1, 2003, the Company acquired the machine vision business of Gavitec AG. Gavitec produces machine vision products for direct part mark identification (or Industrial ID), which can read markings on the surfaces of manufactured items to collect data about product components during the manufacturing process and trace the manufacturing history of the components during the product’s lifetime. Under the terms of the agreement, the Company acquired all of the tangible and intangible assets and assumed certain liabilities associated with Gavitec’s machine vision business. The results of operations of the acquired business have been included in the Company’s consolidated results of operations since the date of the acquisition. The historical results of operations of the acquired business were not material compared to the consolidated results of operations, and therefore, pro forma results are not presented.

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COGNEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12: Acquisitions (continued)

The purchase price consisted of 3,800,000 Euros in cash (or approximately $4,534,000), including 3,500,000 Euros paid at closing, 100,000 Euros to be paid on December 1, 2004, and 200,000 Euros to be paid on December 1, 2005. There is the potential for an additional cash payment of up to 250,000 Euros in both 2004 and 2005 (or approximately $303,000 in each year) depending upon the achievement of certain performance criteria. The contingent consideration will be recorded as purchase price when paid and will be allocated to goodwill.

NOTE 13: Dividends

On February 5, 2004, the Company’s Board of Directors declared a cash dividend of $0.06 per share. The dividend was paid on March 5, 2004 to all stockholders of record at the close of business on February 20, 2004.

NOTE 14: Subsequent Event

On April 22, 2004, the Company’s Board of Directors declared a cash dividend of $0.06 per share. The dividend is payable on May 21, 2004 to all stockholders of record at the close of business on May 7, 2004. Future dividends will be declared at the discretion of the Board of Directors and will depend upon such factors as the Board of Directors deems relevant. The Board of Directors may modify the Company’s dividend policy from time to time.

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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

Certain statements made in this report, as well as oral statements made by the Company from time to time, constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Readers can identify these forward-looking statements by the Company’s use of the words “expects,” “anticipates,” “estimates,” “believes,” “projects,” “intends,” “plans,” “will,” “may,” “shall,” and similar words and other statements of a similar sense. These statements are based upon the Company’s current estimates and expectations as to prospective events and circumstances, which may or may not be in the Company’s control and as to which there can be no firm assurances given. These forward-looking statements involve known and unknown risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include: (1) global economic conditions that impact the capital spending trends of manufacturers in a variety of industries; (2) the cyclicality of the semiconductor and electronics industries; (3) the inability to achieve significant international revenue; (4) fluctuations in foreign exchange rates; (5) the loss of, or a significant curtailment of purchases by, any one or more principal customers; (6) the reliance upon certain sole-source suppliers to manufacture and deliver critical components for the Company’s products; (7) the inability to attract and retain skilled employees; (8) the inability to design and manufacture high-quality products; (9) inaccurate forecasts of customer demand; (10) the technological obsolescence of current products and the inability to develop new products; (11) the inability to protect the Company’s proprietary technology and intellectual property; (12) the Company’s involvement in time-consuming and costly litigation; (13) the impact of competitive pressures; and (14) the inability to achieve expected results from acquisitions. The foregoing list should not be construed as exhaustive and the Company encourages readers to refer to the detailed discussion of risk factors included in Part I — Item 1 of the Company’s Annual Report on Form 10-K. The Company cautions readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. The Company disclaims any obligation to subsequently revise forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date such statements are made.

Results of Operations

Revenue

Revenue for the quarter ended April 4, 2004 increased 46% to $48,169,000 from $32,888,000 for the quarter ended March 30, 2003. The majority of this growth came from sales to the Company’s Original Equipment Manufacturer (OEM) customers who make capital equipment used in the semiconductor industry. Sales to OEM customers increased $11,932,000, or 96%, from the prior year. Sales to end-user customers increased $3,349,000, or 16%, due to higher demand from customers across a variety of industries. Although sales to end-user customers grew from the prior year, they only represented 49% of total revenue in the first quarter of 2004 compared to 62% in the same quarter of 2003 due to the increase in the OEM business. Geographically, revenue increased from the prior year in most of the Company’s worldwide regions, but most significantly in Japan, where many of the Company’s OEM customers are located.

Product revenue for the quarter ended April 4, 2004 increased 51% to $42,560,000 from $28,248,000 from the quarter ended March 30, 2003. The increase in product revenue was primarily due to a higher volume of machine vision systems sold to customers in the semiconductor industry. Service revenue, which is derived from the sale of maintenance and support, education, consulting, and installation services, increased 21% to $5,609,000 from $4,640,000. Many of the Company’s products that were sold during the first quarter of 2004 included bundled maintenance and support programs for which a portion of the revenue will be recognized in future quarters over the program period. As a result, service revenue did not increase as significantly as product revenue, and it decreased as a percentage of total revenue to 12% in 2004 compared to 14% in 2003.

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MVSD revenue for the quarter ended April 4, 2004 increased 59% to $42,271,000 from $26,629,000 for the quarter ended March 30, 2003. The increase in MVSD revenue was primarily due to a higher volume of modular vision systems sold to customers in the semiconductor industry. SISD revenue for the quarter ended April 4, 2004 decreased 6% to $5,898,000 from $6,259,000 for the quarter ended March 30, 2003 due to the timing of system shipments and installations. SISD revenue decreased as a percentage of total revenue to 12% in 2004 compared to 19% in 2003 due to the lower level of sales, as well as the increase in the MVSD OEM business.

Gross Margin

Gross margin as a percentage of revenue was 69% for the quarter ended April 4, 2004 compared to 64% for the quarter ended March 30, 2003. The increase in gross margin was primarily due to the impact of the higher sales volume, as well as a greater percentage of total revenue from the sale of modular vision systems, which carry higher margins than the sale of services and surface inspection systems.

Product gross margin as a percentage of revenue was 73% for the quarter ended April 4, 2004 compared to 69% for the quarter ended March 30, 2003. The increase in product margin was due primarily to the increased sales volume, as well as the shift in product mix to higher-margin modular vision systems. Service gross margin as a percentage of revenue was 38% for the quarter ended April 4, 2004 compared to 39% for the quarter ended March 30, 2003. The decrease in service margin was due principally to higher SISD service costs required to support the growing installed base of surface inspection systems.

MVSD gross margin as a percentage of revenue was 72% for the quarter ended April 4, 2004 compared to 68% for the quarter ended March 30, 2003. The increase in MVSD margin was due primarily to the higher sales volume of modular vision systems. SISD gross margin as a percentage of revenue remained consistent with the prior year at 47% despite the lower level of sales due to product cost improvements.

Operating Expenses

Research, development, and engineering expenses (R,D&E) for the quarter ended April 4, 2004 increased 15% to $6,898,000 from $5,983,000 for the quarter ended March 30, 2003. MVSD R,D&E expenses increased $927,000, or 17%, from the prior year primarily due to higher personnel-related costs, including the additional engineering personnel resulting from the acquisition of the machine vision business of Gavitec AG on December 1, 2003 and the accrual of anticipated company bonuses for 2004. SISD R,D&E expenses were essentially flat with the prior year.

Selling, general, and administrative (S,G&A) expenses for the quarter ended April 4, 2004 increased 23% to $16,314,000 from $13,244,000 for the quarter ended March 30, 2003. MVSD S,G&A expenses increased $2,512,000, or 26%, from the prior year and SISD S,G&A expenses increased $278,000, or 16%, from 2003. Corporate expenses that are not allocated to a division increased $280,000, or 15%, from the prior year. The increase in MVSD and SISD expenses was primarily due to higher personnel-related costs, including commissions related to the higher sales volume, additional end-user sales personnel, and the accrual of anticipated company bonuses for 2004, as well as the unfavorable impact of foreign exchange rate changes on the Company’s international operations. The increase in corporate expenses was due principally to the accrual of anticipated company bonuses for 2004.

Foreign Currency Gain (Loss)

The Company recorded foreign currency gains of $625,000 for the quarter ended April 4, 2004 compared to losses of $627,000 for the same period in 2003. These gains and losses primarily arose from the revaluation and settlement of accounts receivable denominated in currencies other than the subsidiary’s functional currency, as well as the revaluation of intercompany balances that were not fully hedged.

Investment and Other Income

Investment and other income decreased slightly to $1,274,000 for the quarter ended April 4, 2004 from $1,294,000 for the same period in 2003 due to lower average interest rates on the Company’s invested balances.

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Income Taxes

The Company’s effective tax rate for the quarter ended April 4, 2004 was 29% compared to 31% for the quarter ended March 30, 2003. The decrease in the effective tax rate was due primarily to more of the Company’s profits being earned and taxed in lower tax jurisdictions.

Liquidity and Capital Resources

At April 4, 2004, the Company’s cash, cash equivalent, and investment balances increased $31,157,000 to $334,659,000 from $303,502,000 at December 31, 2003. The Company’s cash requirements during the quarter ended April 4, 2004 were met with positive cash flow from operations, as well as the proceeds from the issuance of common stock under stock option plans that totaled $20,407,000. Cash requirements consisted of operating activities, capital expenditures, and the payment of dividends. Capital expenditures during the quarter ended April 4, 2004 totaled $570,000 and consisted principally of expenditures for computer hardware and software.

On June 30, 2000, Cognex Corporation became a Limited Partner in Venrock Associates III, L.P., a venture capital fund. The Company has committed to a total investment in the limited partnership of up to $25,000,000, of which $14,375,000 had been contributed as of April 4, 2004, including $750,000 during the quarter ended April 4, 2004. The commitment to contribute capital expires on January 1, 2005, and the Company does not have the right to withdraw from the partnership prior to December 31, 2010.

On March 31, 2003, the Company acquired the wafer identification business of Siemens Dematic AG for 7,000,000 Euros in cash (or approximately $7,630,000), with the potential for an additional cash payment in 2005 of up to 1,700,000 Euros (or approximately $2,063,000) depending upon the achievement of certain performance criteria. The March 31, 2003 cash payment of 7,000,000 Euros was based upon an estimated balance sheet for the wafer identification business as of March 31, 2003. After receipt of the final March 31, 2003 balance sheet and resolution of certain items in dispute, Siemens reimbursed Cognex 796,000 Euros (or $868,000).

On December 1, 2003, the Company acquired the machine vision business of Gavitec AG for 3,800,000 Euros in cash (or approximately $4,534,000), including 3,500,000 Euros paid at closing, 100,000 Euros to be paid on December 1, 2004, and 200,000 Euros to be paid on December 1, 2005. There is the potential for an additional cash payment of up to 250,000 Euros in both 2004 and 2005 (or approximately $303,000 in each year) depending upon the achievement of certain performance criteria.

On December 12, 2000, the Company’s Board of Directors authorized the repurchase of up to $100,000,000 of the Company’s common stock. There were no shares repurchased under this program during the quarter ended April 4, 2004. The Company may repurchase additional shares under this program in future periods depending upon a variety of factors, including the market value of the Company’s common stock and the average return on the Company’s invested balances.

On February 5, 2004, the Company’s Board of Directors declared a cash dividend of $0.06 per share. The dividend, amounting to $2,676,000, was paid on March 5, 2004 to all stockholders of record at the close of business on February 20, 2004. On April 22, 2004, the Company’s Board of Directors declared a cash dividend of $0.06 per share payable on May 21, 2004 to all stockholders of record at the close of business on May 7, 2004. Future dividends will be declared at the discretion of the Board of Directors and will depend upon such factors as the Board of Directors deems relevant. The Board of Directors may modify the Company’s dividend policy from time to time.

The Company believes that its existing cash, cash equivalents, and investment balances, together with continued positive cash flow from operations, will be sufficient to meet its operating, investing, and financing activities in 2004, as well as for the next few years.

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New Pronouncements

In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, “Consolidation of Variable Interest Entities,” to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities, and activities of another entity. Previously, a company generally included other entities in its consolidated financial statements only if it controlled the entity through voting interests. Interpretation No. 46 changes that guidance by requiring variable interest entities, as defined, to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns. Interpretation No. 46 also requires disclosure about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest. On December 24, 2003, the FASB deferred the effective date of Interpretation No. 46 for certain transactions until periods ending after March 15, 2004. The adoption of Interpretation No. 46 during the quarter ended April 4, 2004 did not have a material impact on the Company’s consolidated financial statements.

The Company has a limited partnership interest in Venrock Associates III, L.P., a venture capital fund and a deposit on certain real estate for which it has an option to purchase. While the Company’s investment in these entities represents a variable interest, the Company believes it is not the primary beneficiary.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to the Company’s exposures to market risk since December 31, 2003.

ITEM 4: CONTROLS AND PROCEDURES

As required by Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, the Company has evaluated, with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, the effectiveness of its disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures are effective in ensuring that material information relating to the Company, including its consolidated subsidiaries, is made known to the certifying officers by others within the Company and its consolidated subsidiaries during the period covered by this report. From time to time, the Company reviews the disclosure controls and procedures, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that the Company’s systems evolve with its business. There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended April 4, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

    To the Company’s knowledge, there are no pending legal proceedings, other than as described in the section captioned “Intellectual Property,” appearing in Item I of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003, which are material to the Company. There have been no material developments in such legal proceedings since December 31, 2003. In addition, from time to time, the Company may be subject to various claims and lawsuits by competitors, customers, or other parties arising in the ordinary course of business, including lawsuits charging patent infringement. There can be no assurance as to the outcome of any of this litigation.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

    None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

    None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    None

ITEM 5. OTHER INFORMATION

    None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     (a) Exhibits

    31.1 – Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934
 
    31.2 – Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934
 
    32.1 – Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
    32.2 – Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

     (b) Reports on Form 8-K

    On January 26, 2004, the Company furnished a Current Report, dated the same date, on Form 8-K regarding its earnings press release for the fiscal quarter ended December 31, 2003.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

         
DATE: May 10, 2004
      COGNEX CORPORATION
 
       
  By:   /s/ Robert J. Shillman
      Robert J. Shillman
      President, Chief Executive Officer,
      and Chairman of the Board of Directors
      (duly authorized officer, principal executive officer)
 
       
  By:   /s/ Richard A. Morin Richard A. Morin
      Senior Vice President of Finance, Chief
      Financial Officer, and Treasurer
      (duly authorized officer, principal financial and accounting officer)

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